Midyear Global Outlook, Pt 1: Skewing to the Downside

Our analysts Seth Carpenter and Serena Tang discuss why they believe the global economy is set to slow meaningfully in the second half of 2025.

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Serena: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's, Chief Global Cross-Asset Strategist.

Seth: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.

Serena: Today we'll discuss Morgan Stanley's midyear outlook for the global economy and markets.

It's Wednesday, May 21st at 10am in New York.

Seth, you published a year ahead outlook last November. Since President Trump took office back in January, there's been pretty significant policy and economic uncertainty and quite a few surprises. With this in mind, what is your current outlook for the global economy for the second half of this year and into 2026.

Seth: So, we titled the outlook Skewed to the Downside because we really do think the U.S. economy, the global economy, is set to slow meaningfully from where we were coming into this year. Let's start with the U.S.

As you said, policy changes came in a lot this year since the new administration took over. I would say the two key ones from a macro perspective so far have been trade policy and immigration policy.

Tariffs have gone up, tariffs have gone down, tariffs have been suspended. Right now, what we think is going to ultimately take place is that we will see persistent, notable tariffs on China, lower tariffs on the rest of the world, and then we'll have to see how things evolve. What does that mean? Well, it means for the U.S. higher inflation and lower growth. In addition, immigration reform means that growth is going to slow because the growth rate of the labor force is going to slow.

Now around the rest of the world, the tariff shock matters as well. When the U.S. puts in tariffs on its imports from other countries, that's negative demand for those other countries. So, we're looking for pretty weak growth in the euro area. Now, I will note, lots of people were excited about possible expansionary fiscal policy in Germany, and we think that's still there. We just don't think it's enough to give the euro area robust growth.

In Asia, China's a main driver of the economy. China is a big recipient of these tariffs. We think the deflation cycle that we expected in China keeps going on. This reduction in demand from the U.S. is not going to help, but there'll probably be a little bit at the margin offsetting fiscal policy.

So, what does that mean put together? Lackluster growth in China. Call it 4 percent slow growth for yet another year. Overall, the global economy should step down. Will it be a recession? That's one of the key questions that we hear from clients, but we don't think so. Not quite. Just a meaningful step down

Serena: Interesting. Any particular regions that seem to be bright spots or surprises -- or perhaps have seen the biggest shift in your outlook?

Seth: I guess I'd flag two potential bright spots around the world. The first is India. India has been, for us, a favorite. It will have the highest growth rate of any economy that we have in our coverage area. And because it's such a big economy, that's part of why the global economy can't lose that much steam. India has lots going for it. There are cyclical factors boosting growth in the near term. But there are also longer-term structural policy driven reasons to think that Indian growth will stay solid for the foreseeable future.

I guess I'd also throw in Japan. Now its growth rate isn't going to be anywhe